SLOVAKIA: Fiscal changes in the insurance industry postponed for January 2019

The introduction of the new 8% tax on non-life insurance premiums in Slovakia was postponed from October 2018, to January 2019, to allow insurance companies prepare for the change, the country's parliament decided on 7 June.

Later this month the Finance Ministry's proposal will be discussed by the legislative's finance committee in a second reading. Basically, the change will consist in replacing the current 8% special levy on the new non-life insurance policies with a new 8% tax in all segments of non-life insurance, except for mandatory contractual insurance, where the levy will be kept.

Largely criticized by the insurance industry's representatives, the MF's proposal was initially providing for a general taxation, including life insurance, and different values of the percentage applied, depending on the insurance class, from 0 to 18%.

Although the current version is much simpler than the initial one, it still raises the industry's discontent. One of the main reasons of criticism refers to the expected increase in the insurance prices, which given the low insurance coverage in Slovakia is seen as hindering the efforts to reduce the insurance gap in the country. Government's officials have said that there insurers should use other methods to cope with the new tax than increasing prices, by lowering their own profit margin, optimizing operational costs etc. In opposition with this opinion, many industry representatives have pointed out that their own profit margin is of 4-5%, which means that non-transferring the tax effects to customers by increasing prices will push companies' profitability in negative territory.

Anotherstrong objection against the new tax introduction is its retroactive character, since the tax will apply also to the existing insurance policies - about 6 million, according to the local insurers' association - sold at prices calculated without this tax. To compensate for the retroactive effect, insurers will also have to increase prices, making insurance products less attractive and affordable.

"The new tax paradoxically impacts people who voluntarily and thoughtfully bought insurance policies to protect themselves or their property from unpredictable events and so do not fall into the state's social net,"said JozefinaZakova, general director of the Slovak Insurance Association (SLASPO), quoted by The Slovak Spectator.

While initially the government expectations were to collect EUR 36 million from the new tax, the latest estimations predict a total of about EUR 25 million, which is less by some 30%. Yet, it will most probably used to pay some social benefits, instead of being directed - as one would expect - towards public works that would possibly mitigate nat cat risks across the country, analysts quoted by the local press say.

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According to the Slovak Insurers Bureau (SKP) and Statistical Office of the Slovak Republic, there were around 241,000 motor vehicles without a valid MTPL policy on road in 2018. Through the Guarantee Fund, SKP paid for 2,706 claims as a result of accidents caused by uninsured vehicles.

In the first three quarters of 2018, the Slovak insurance market totaled EUR 1.67 billion, thus increasing by 3.82% y-o-y, according to the quarterly financial figures published by the National Bank of Slovakia (NBS).

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The Slovak Parliament adopted on 20 June thenew legislation replacing the current 8% insurance levy with a new tax of the same amountapplied to non-life insurance premiums, except for MTPL for which the current levy will be maintained.

Last year, the growth rate of the local insurance market (+8.56%) was almost double that of the advance of the economy (+4.69%), thus the calculated indicators as the insurance penetration degree (2.51%) and the insurance density (EUR 393 per capita) significantly evolved as compared to FY2016.

A new indirect taxation system for the insurance premium is in preparation in Slovakia, replacing the current special insurance 8% levy with a rate which will vary from 2 to 18% depending on the type of the policy, local press reads.

In the first three quarters of 2017, the Slovak insurance market totaled EUR 1.61 billion, representing an increase of 7.62% y-o-y, according to the quarterly financial figures published by the National Bank of Slovakia (NBS).

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